TEST OF AUTOCORRELATION

Durbin-Watson Test
Durbin-Watson test is a common test for serial correlation or also known as
autocorrelation. It is used to measure the correctness of the model used in the
study. The major cause of auto correlated error term in the model is that the model
is mis-specified. This happened whenever one or more key explanatory variables
have been omitted. Durbin-Watson statistics show that the model is good when the
value of the Durbin-Watson statistics is between 1.5 and 2.5. If the value is below
1.5, then the model has an error and if the value is higher than 2.5, this indicates
the presence of negative autocorrelation. Negative autocorrelation is not
particularly common.
Steps to perform Durbin-Watson Test:
1.

Estimates the regression equation

HPI = + 1GDPG + 2INF + 3LF + ln4POP + 5RPGT + e
HPI = -1247.062 + 0.093029GDPG + 3.159132INF + 8.538949LF + 250.6980POP - 0.330094RPGT + e

2.

Obtain the OLS residuals and calculate the DW statistics.

d=

Tt =2 (et- et-1)2
T

t =1 t t

, Durbin-Watson statistics = 1.374013

3.

Set the hypothesis

H0: There is no serial correlation between the residual
H1: There is serial correlation between the residual

4.

Determine the sample size (n) and the number of explanatory variables (k).
n= 26
k= 5

5.

Find the upper and lower critical d, dL and dU.

From the statistical table, dL= 0.979 and dU= 1.873
4 dU
= 4 1.873 ;
4 dL = 4 0.979
= 2.127
= 3.021

6.

Decision rule:
If d* < dL , Reject H0(positive serial correlation)
If 4 dL < d* < 4 , Reject H0(negative serial correlation)
If dU < d* < 4 dU , do not reject H 0
If dL < d* < dU , the test is inconclusive (indecision).

DW test is , d*= 1.374013, which falls in dL < d* < dU , the test is

inconclusive (indecision).
Since the result of DW- statistic lies in dL < d* < dU, we cannot determine the
existence of serial correlation as we cannot make conclusion, then we need to
run the Breusch-Godfrey (BG) test.
Breusch-Godfrey (BG) test
Breusch-Godfrey (BG) test is a common test for serial correlation or also known as
autocorrelation. It is used to measure the correctness of the model used in the
study. The major cause of auto correlated error term in the model is that the model
is mis-specified. This happened whenever one or more key explanatory variables
have been omitted. The model is good when the value of the Chi- square is more
than 0.05. If the value is below 0.05, then the model is significant and if the value is
more than 0.05, this indicates that the model is not significant.
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared

1.329051
3.345450

Prob. F(2,18)
Prob. Chi-Square(2)

0.2895
0.1877

From the result generated by Eviews, the prob. Chi-Square is 0.1877 which is more
than 0.05, therefore the model is not significant indicates that the serial correlation
is not present.